BP 2012 Annual Report Download - page 176

Under the settlement agreements with co-owners Anadarko and MOEX,
and with Cameron International, the designer and manufacturer of the
Deepwater Horizon blowout preventer, with M-I L.L.C, (M-I), the mud
contractor, and with Weatherford, the designer and manufacturer of the
float collar used on the Macondo well, BP has agreed to indemnify
Anadarko, MOEX, Cameron, M-I and Weatherford for certain claims
arising from the accident. It is therefore possible that BP may face claims
under these indemnities, but it is not currently possible at this time to
reliably measure any obligation in relation to such claims and therefore no
amount has been provided as at 31 December 2012.
Business economic loss claims received by the DHCSSP to date are being
paid at a significantly higher average amount than previously assumed by
BP in formulating the original estimate of the cost of the PSC settlement.
Further, the settlement agreement has been interpreted by the claims
administrator in a way that BP believes is incorrect resulting in a higher
number and amount of claims being determined. As more fully described
in Legal proceedings on pages 162-169, this matter has been considered
by the court and on 5 March 2013, the court affirmed the claims
administrator’s interpretation of the settlement agreement and rejected
BP’s position as it relates to business economic loss claims. BP strongly
disagrees with the ruling of 5 March 2013, and intends to pursue all
available legal options, including rights of appeal, to challenge this ruling.
Given the inherent uncertainty that exists as BP pursues all available legal
options to challenge the recent ruling, and the higher number of claims
received and higher average claims payments than previously assumed by
BP, which may or not continue, management has concluded that no
reliable estimate can be made of any business economic loss claims not
yet received or processed by the DHCSSP.
BP’s current estimate of the total cost of those elements of the PSC
settlement that can be estimated reliably, which excludes any future
business economic loss claims not yet received or processed by the
DHCSSP, is $7.7 billion. If BP is successful in its challenge to the court’s
ruling, the total estimated cost of the settlement agreement will,
nevertheless, be significantly higher than the current estimate of $7.7 billion,
because business economic loss claims not yet received or processed are
not reflected in the current estimate and the average payments per claim
determined so far are higher than anticipated. If BP is not successful in its
challenge to the court’s ruling, a further significant increase to the total
estimated cost of the settlement will be required. However, there can be no
certainty as to how the dispute will ultimately be resolved or determined. To
the extent that there are insufficient funds available in the Trust fund,
payments under the PSC settlement will be made by BP directly and
charged to the income statement. For further information see Financial
statements – Note 36 and Note 43 and Risk factors on pages 38-44.
Pensions and other post-retirement benefits
Accounting for pensions and other post-retirement benefits involves
judgement about uncertain events, including estimated retirement dates,
salary levels at retirement, mortality rates, rates of return on plan assets,
determination of discount rates for measuring plan obligations,
assumptions for inflation rates, US healthcare cost trend rates and rates of
utilization of healthcare services by US retirees.
These assumptions are based on the environment in each country.
Determination of the projected benefit obligations for the group’s defined
benefit pension and post-retirement plans is important to the recorded
amounts for such obligations on the balance sheet and to the amount of
benefit expense in the income statement. The assumptions used may
vary from year to year, which will affect future results of operations. Any
differences between these assumptions and the actual outcome also
affect future results of operations.
Pension and other post-retirement benefit assumptions are reviewed by
management at the end of each year. These assumptions are used to
determine the projected benefit obligation at the year-end and hence the
surpluses and deficits recorded on the group’s balance sheet, and pension
and other post-retirement benefit expense for the following year. In 2013,
when we adopt the revised version of IAS 19 ‘Employee benefits’ (see
Note 1 for further information), we will be required to apply the same rate
of return on plan assets as we use to discount our pension liabilities. We
expect this accounting change to adversely impact our earnings by
approximately $1 billion on a pre-tax basis, with no impact on cash flow.
The pension and other post-retirement benefit assumptions at December
2012, 2011 and 2010 are provided in Financial statements – Note 37 on
page 239.
The assumed rate of investment return, discount rate, inflation rate and
the US healthcare cost trend rate have a significant effect on the amounts
reported. A sensitivity analysis of the impact of changes in these
assumptions on the benefit expense and obligation is provided in Financial
statements – Note 37 on page 239.
In addition to the financial assumptions, we regularly review the
demographic and mortality assumptions. Mortality assumptions reflect
best practice in the countries in which we provide pensions and have
been chosen with regard to the latest available published tables adjusted
where appropriate to reflect the experience of the group and an
extrapolation of past longevity improvements into the future. A sensitivity
analysis of the impact of changes in the mortality assumptions on the
benefit expense and obligation is provided in Financial statements – Note
37 on page 239.
Actuarial gains and losses are recognized in full within other
comprehensive income in the year in which they occur.
Relationships with suppliers and
contractors
Essential contracts
BP has contractual and other arrangements with numerous third parties in
support of its business activities. This report does not contain information
about any of these third parties as none of our arrangements with them is
considered to be essential to the business of BP.
Suppliers and contractors
Our processes are designed to enable us to choose suppliers carefully on
merit, avoiding conflicts of interest and inappropriate gifts and
entertainment. We expect suppliers to comply with legal requirements
and we seek to do business with suppliers who act in line with BP’s
commitments to compliance and ethics, as outlined in our code of
conduct. We engage with suppliers in a variety of ways, including
performance review meetings to identify mutually advantageous ways to
improve performance.
Creditor payment policy and practice
Statutory regulations issued under the UK Companies Act 2006 require
companies to make a statement of their policy and practice in respect of
the payment of trade creditors. In view of the international nature of the
group’s operations there is no specific group-wide policy in respect of
payments to suppliers. Relationships with suppliers are, however,
governed by the group’s policy commitment to long-term relationships
founded on trust and mutual advantage. Within this overall policy,
individual operating companies are responsible for agreeing terms and
conditions for their business transactions and ensuring that suppliers are
aware of the terms of payment.
Material contracts
On 6 August 2010, BP entered into a trust agreement with John S Martin,
Jr and Kent D Syverud, as individual trustees, and Citigroup Trust-
Delaware, N.A., as corporate trustee (the Trust Agreement) which
established the Deepwater Horizon Oil Spill Trust (the Trust) to be funded
in the amount of $20 billion (the trust fund) over the period to the fourth
quarter of 2013. During the fourth quarter of 2012, BP made a final
contribution to the Trust to complete the funding of the full $20-billion
commitment. The trust fund is available to satisfy legitimate individual and
business claims that were previously administered by the Gulf Coast
Claims Facility (GCCF), state and local government claims resolved by BP,
final judgments and settlements, state and local response costs, and
natural resource damages and related costs. The trust fund is available to
satisfy claims that were previously processed through the transitional
court-supervised claims facility, to fund the qualified settlement funds
established under the terms of the settlement agreements with the
Plaintiffs’ Steering Committee (PSC) administered through the court-
supervised settlement program, and to satisfy claims processed through
174 Additional disclosures
BP Annual Report and Form 20-F 2012